Annual report and accounts 2012

Retirement benefit liabilities

OAO Severstal and Subsidiaries
Notes to the Consolidated Financial Statements
24. Retirement benefit liabilities

for the years ended December 31, 2012, 2011 and 2010
(Amounts expressed in thousands of US dollars, except as otherwise stated)

The Group provides for its employees the following retirement benefits, which are actuarially calculated as defined benefit obligations: lump sums payable to employees on retirement, monthly pensions, jubilee benefits, invalidity and death lump sums, burial expenses compensations, healthcare benefits, life insurance and other benefits.

The current portion of retirement benefit liabilities is included in caption ‘Other current liabilities’. The total amount of the retirement benefit liabilities is presented in the table below:

 December 31,
 201220112010
Current portion4,9178,942  17,127  
Non-current portion201,552161,734  164,555  
 206,469170,676  181,682  

The Group’s weighted average duration of the defined benefit obligations equaled to 16 years as at December 31, 2012.

The following assumptions were used to calculate the retirement benefit liability:

 December 31,
 201220112010
Discount rates:   
Russia6.6% to 7.0%8.3% to 8.4%7.3% to 7.8%
USA3.5%4.3%4.8%
Future rates of benefit increase:   
Russia4.7% to 5.3%4.7%5.2% to 6.3%
USAFixed at 0%Fixed at 0%Fixed at 0%

The present value of the defined benefit obligation less the fair value of plan assets is recognized as a retirement benefit liability in the statement of financial position.

 December 31,
 20122011201020092008
Present value of the defined benefit obligation273,059230,517237,1091,008,654987,418
Fair value of the plan assets(66,590)(59,841)(55,427)(220,940)(208,122)
Retirement benefit liability206,469170,676181,682787,714779,296

The movements in the defined benefit obligation were as follows:

 Year ended December 31,
 201220112010
Opening balance230,517237,1091,008,654
Reclassified to liabilities related to assets held for sale--(787,660)
Benefits paid(23,876)(23,820)(55,486)
Interest cost16,94017,21048,551
Service cost4,8564,10720,984
Actuarial losses*33,9987,47514,416
Foreign exchange differences10,624(11,564)(12,350)
Closing balance273,059230,517237,109
    

* Actuarial losses arise primarily from changes in financial assumptions.

The movements in the plan assets were as follows:

 Year ended December 31,
 201220112010
Opening balance59,84155,427220,940
Reclassified to liabilities related to assets held for sale--(162,163)
Contributions made during the year13,54611,40916,588
Benefits paid(16,650)(5,703)(27,944)
Return on assets5,0454,16210,323
Actuarial gains/(losses)*1,353(1,409)(470)
Foreign exchange differences3,455(4,045)(1,847)
Closing balance66,59059,84155,427

* Actuarial gains/(losses) arise primarily from changes in financial assumptions.

The defined benefit obligation analysis was as follows:

 December 31,
 201220112010
Wholly unfunded161,850139,994143,724
Partly funded111,20990,52393,385
 273,059230,517237,109

The plan assets analysis was as follows:

 December 31,
 201220112010
Corporate bonds36,83932,28322,747
Shares in mutual funds14,02813,83012,479
Deposits8,2524,4884,585
Equity instruments4,2313,6618,912
Government bonds2,5112,6582,688
Cash3245451,067
Other investments4052,3762,949
 66,59059,84155,427

The Group's best estimate of contributions expected to be paid to the plan in 2013 is US$ 15.9 million.

The Group’s retirement benefit service costs are allocated and recognized in the income statement as part of ‘Cost of sales’ and ‘General and administrative expenses’ proportionally to related salary expenses.

Interest cost and return on plan assets are recognized as part of ‘Interest expense’; actuarial gains/(losses) are recognized as a separate component in other comprehensive income.